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This election was supposed to build on the Conservative’s slim majority, give Theresa May full legitimacy as Prime Minister and set the stage for the UK to take a firm position in upcoming Brexit negotiations. Yet we’re waking up this morning to a hung parliament and the most uncertain political outlook since the 2010 election which resulted in a coalition government.

The result was certainly a surprise for traders and bookies, if not the pollsters who acquitted themselves quite well this time round. But if the result was unexpected, the market reaction was less so. Sterling plunged around 2% against the dollar after the first exit poll indicated a hung parliament and then went sideways until just a few hours ago. It’s currently on the slide again as investors factor in just how damaging this result could be for future Brexit negotiations. There’s also the political uncertainty as Theresa May seems to have lost a stack of goodwill, if not the outright support, of many in her own party. Yet for now it seems as if she is facing down her critics and refusing to quit. Meanwhile, the FTSE100 is stronger this morning as traders factor in the positive effect of weaker sterling for UK multinationals.

Stock Index Update

· Equity rally continues

· FTSE100 bounces on sterling weakness

The FTSE100 was firmer in early trade this morning thanks to the sell-off in sterling overnight. The British pound slumped straight after last night’s exit poll indicated that the Tories would lose their majority and the country was set to end up with a hung parliament. Traders factored in the positive effect of weaker sterling for UK multinationals.

US indices ended modestly higher last night but off their best levels. Investors were relieved that there was nothing particularly damaging to President Trump in yesterday’s testimony from former FBI Director James Comey.

European equities were sharply higher in early trade yesterday. Investor sentiment was decidedly positive despite uncertainty ahead of the ECB meeting, UK General Election and long-awaited testimony from ex-FBI director James Comey. Banks and utilities were the main drivers of the move with traders citing Spanish banking giant Santander’s rescue of Banco Popular, its troubled peer, as a major positive catalyst. This helped to lift other European banks such as Spain’s Bankia, France’s Societe Generale and Italy’s UniCredit. European utilities were driven by Germany’s E.ON and RWE. Both rose over 5% after the main German court declared that a nuclear fuel tax was illegal. Yet despite these moves, the UK’s FTSE100 spent most of the day little-changed as voting in the General Election took place.

Commodities Update

· Oil steadies

· Gold slumps on large sell order

Oil was steadier in early trade yesterday and managed a modest recovery following their 5% slump on Wednesday. However, crude was unable to hold onto its early gains and was soon trading back in negative territory. WTI was flirting with a mild support level around $45.20/50. A break below here on a closing basis would open up the possibility of a retest of $44 and the lows hit in early May. Brent already looks as if it’s on course to revisit its own May lows around $47 per barrel.

Both contracts have come under constant selling pressure since the OPEC meeting in Vienna on 25th May. The extension to the OPEC/non-OPEC production cut agreement has failed to persuade investors that enough has been done to bring the market back into balance. On top of this, the latest updates on US inventories showed unexpectedly large builds in crude oil, gasoline and distillates. These reports were responsible for Wednesday’s sharp sell-off.

Gold and silver were steady in early trade yesterday after steep falls on Wednesday. However, both metals slumped again soon after the US open. Initially it was unclear what the trigger for the sell-off was. In fact, it now appears that the slump in gold (which also drove silver prices lower) was triggered by a $4 billion sell order in the US futures market. Why that should be is anyone’s guess. It could be that an institution had accumulated the position as insurance ahead of today’s events. It could be that this investor saw little reason to hold the gold any longer as there was little market risk from the ECB, Comey or the UK election. The moves left both gold and silver on course to make their first weekly losses in five weeks. The question now is whether buyers will come in and take advantage of the sell-off, or if the pull-back is part of a more substantial move lower.

Forex Update

· Euro weaker after ECB meeting

· Sterling slumps on election result

There was relatively little movement across FX yesterday morning as traders stood pat ahead of the ECB rate decision and President Draghi’s subsequent press conference. Even the euro remained fairly steady after the ECB statement was released. The key change from the March announcement was that the Governing Council now says it “…expects the key ECB interest rates to remain at their present levels for an extended period of time…”). Previously it said they could also be lower. But the ECB countered this by saying it remains prepared to extend its bond buying programme if required. However, the euro did sell off briefly during ECB President Mario Draghi’s press conference. The trigger was when Mr Draghi confirmed reports from Wednesday about the downgrade to the ECB’s inflation projections. Comparing current inflation projections from those made in March this year, the ECB’s governing council put headline CPI (including food and energy) at 1.5% versus 1.7% in 2017; at 1.3% versus 1.6% in 2018 and at 1.6% versus 1.7% in 2019. In contrast, the ECB revised up its growth forecasts, but these were more modest than the inflation downgrades.

Sterling fell yesterday as voting took place in the UK General Election. This wasn’t linked to any opinion poll projections as none are allowed until after the polling stations close. Instead, investors appeared to be trimming their exposure after sterling’s recent rally. This looked wise in retrospect as the pound slumped once last night’s exit polls were released. These indicated that the Tories were set to lose their majority and that has come to pass this morning. This has weakened the UK’s position ahead of upcoming Brexit negotiations.

Upcoming events

Today’s significant events and economic data releases include the UK’s Manufacturing Production, Goods Trade Balance, Construction Output, Inflation Expectations and Industrial Production. From the US we have Wholesale Inventories.

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